The elasticity of supply or price elasticity of supply measures the degree of responsiveness of quantity supplied to changes in the own price of the product. It is a percentage change in the quantity supplied with respect to the percentage change in the price of the commodity.
es = Percentage change in quantity supplied/Percentage change in price
es = ∆Q/∆P * P/Q
where P = Initial price, ∆P = Change in price, Q = Initial quantity, ∆Q = Change in quantity supplied
Types of Elasticity
- Perfectly inelastic supply: Supply of a commodity is said to be perfectly inelastic if the supply does not respond to a change in the price of the commodity. Supply is constant even at zero price, i.e. Ep = 0.
- Perfectly elastic supply: Supply of a commodity is said to be perfectly price-elastic if there is an infinite change in quantity supplied in response to a small change in price, i.e. Ep = α.
- Relatively elastic supply: Supply of a commodity is said to be relatively elastic supply if the percentage change in quantity supplied exceeds the percentage change in price, i.e. Ep > 1.
- Relatively inelastic supply: Supply of a commodity is said to be relatively inelastic supply if the percentage change in quantity supplied is less than the percentage change in price, i.e. Ep < 1.
- Unit elastic: Supply of a commodity is said to be unit elastic if the percentage change in supply is equal to percentage change in price, i.e. Ep = 1.
Factors Determining Elasticity of Supply
- Possibility of shift from one line of production to the other: If the producers can easily shift from the production of other products to the one whose price has increased, then the supply would be more price elastic. The supply of industrial products is more elastic.
- Time horizon: Supply elasticity also depends on the length of time. Supply of any commodity may be price inelastic during a short-run period as it is difficult to change the quantities supplied in response to price change, but it may become price-elastic in the long run.
- Supply of inputs: If the nature and supply of inputs are easily available, then the supply of that commodity will be relatively elastic. Otherwise, its supply becomes relatively inelastic.
- Nature of the commodity: If the goods are perishable, then their supply becomes relatively inelastic and the supply of durable goods becomes relatively elastic.
- Cost of production: If the average and marginal costs of production increase with the increase in the production of a commodity, then the supply of such a commodity becomes relatively inelastic.
Importance of Elasticity of Supply
- Price determination: The concept of time element has more significance in price determination which depends on elasticity of supply.
- Taxation: The Finance Minister can impose high taxes on those goods whose supply is inelastic and less tax on those goods whose supply is elastic. Hence, it is more useful to the government.
Meaning and Functions of Money